“Gross revenue”? “Net revenue”? You’ve probably heard these terms before. But what are they? And why should you care? Well, if you’re a small business owner, you should already know the difference. If you don’t, stay tuned.
Understanding the difference between gross and net revenue is an important part of analyzing your business’s performance and making plans for its future. Gross revenue or total sales within a given period is the sum of all the goods and services that have been sold. For example, let’s say you owned an online clothing store. During January, you sold a total of 200 articles of clothing at $30 each, your gross revenue for the month would be $6,000.
Now suppose you spent $2,000 to buy the clothes you sold in January. Here, your net revenue for January would be $4,000. Therefore, the difference between gross revenue and net revenue is that one of them, new revenue, takes into account the cost of the goods sold, while the other, gross revenue, does not.
On This Page
Now that you’re hopefully on this page in understanding what gross and net revenue are, you need to understand why the difference is important. Let’s revisit the example of the clothing store. If you were able to increase the number of units sold in February to 210 pieces of clothing, but your supplier also increased the price of the goods you sold to $2,100, then your gross revenue would see an increase to $6,300, while your net revenue is reduced to $3,900.
If numbers are confusing to you, a business analyst can help you to interpret them so that you can devise strategies to reduce costs and improve profitability.
The use of gross and net revenue figures can help you to not only assess and improve the performance of your business, but it is also crucial for reporting your income in filing income taxes.
Your Tax Liability
Depending on the unique circumstances of your business, and how you sell goods and services, using either gross revenue or net revenue to report your business’s income can have a significant impact on your tax liability. Many would argue that tax reporting is the most critical area in demonstrating the difference between gross and net revenue.
You should consult a professional accountant or tax specialist to help you decide which to use. Paying taxes is a necessary part of running a business. But as far as you and your business are concerned, limiting your tax liability is even more important as the money saved can be re-invested in your business.
Knowledge Is Power
Knowing the difference between gross and net revenue, especially as it relates to reporting income for taxes, is potentially vital information for your business.
If you’re an entrepreneur you should have realized long ago that knowledge is power. Nobody is going to tell you every fine little detail to help you grow your business. It’s your responsibility to find out on your own.
